Supervisory convergence in Europe

June 2017 | FEATURE | FINANCE & INVESTMENT

Financier Worldwide Magazine

June 2017 Issue

At a time when the future of the European project itself has been called into question by political upheaval in the UK and elections in France and Germany, it is notable that there have been increased efforts by some European institutions to boost pan-European integration and regulatory convergence.

Increasingly, European institutions are pushing for the streamlining and convergence of regulations, particularly in the asset management and financial services industries, in order to tackle perceived shortcomings in these areas. While the goal of establishing a common supervisory culture is a challenging task, it is also an important one for regulators and Member States alike.

For the European single market to function smoothly and efficiently, the argument goes, it is imperative that there is a convergence of regulatory and supervisory practices between the competent authorities (CAs) of the soon-to-be 27 European Member States. Though there are a number of common rules applicable across the European Union (EU), there are still divergent supervisory practices applicable across the Member States, and the presence of gaps in the regulatory landscape can present a risk to the effective oversight of cross-border organisations, for example, as well as the development of a level playing field in the financial services industry.

To plug any potential gaps, efforts are underway to revamp supervisory convergence across the EU. In late March, the Board of Supervisors of the European Securities and Markets Authority (ESMA) appointed João Sousa Gião, Member of the Board of Administration of the Comissão do Mercado de Valores Mobiliários (CMVM) of Portugal to serve as the chair of the ESMA’s Supervisory Convergence Standing Committee. This Committee is comprised of experts drawn from ESMA staff and the national CAs for securities markets regulation in Member States, and is responsible for policy development.

Though the Brexit vote has meant that a key cornerstone of the EU will soon be outside of the European project, the withdrawal of the UK will not have a negative bearing on European regulatory supervision.

According to the ESMA’s 2017 Supervisory Convergence Work Programme, the ESMA and national CAs will focus their supervisory convergence work on a number of priorities going forward. First, the implementation of MiFID II/MiFIR and the European Commission’s new market abuse regulation (MAR), including the underlying IT projects. The delay in application of MiFID II/MiFIR has meant preparations for their eventual implementation will remain a priority until early 2018. This will require CAs and the ESMA to dedicate considerable resources to overseeing preparatory work. Second, improving the quality of data collected by national CAs, by focusing on their efforts to prepare for, and to enforce compliance with, various reporting requirements under EU legislation, such as MiFID II/MiFIR, EMIR and AIFMD. Third, investor protection in the context of cross-border provision of services. And finally, convergence in the supervision of European Union central counterparties.

Much of the ESMA’s push for convergence has been driven by inconsistencies the authority has detected in the frameworks of a number of pieces of key pan-European legislation, including the UCITS, AIFMD, PRIIPs and MiFID II. According to the ESMA, for example, there are variations in costs disclosure requirements under PRIIPs, MiFID II and the UCITS KIID.

Further, on 24 March 2017, the European Commission re-published a report, which assesses tackling national barriers to capital flow, with a view to accelerating the creation of the capital markets union (CMU). The report lists a roadmap of proposed actions, together with possible deadlines, and the Commission invited Member States to discuss and agree on the actions set out in the roadmap within the timeframes suggested.

Regarding investment funds, the roadmap of proposed actions makes a number of suggestions including that: (i) Member States should continue reviewing national rules with a view to promoting common understanding and regulatory convergence of pre-marketing and reverse solicitation by Q4 2017; (ii) Member States should ensure that all fund notification-related fees should be published in a comprehensive and user-friendly manner on a single website by Member States by Q4 2017; and (iii) an expert group, together with ESMA, should consider setting up a single public domain for fee-related information, in the form of a comparative website or a central repository.

Brexit, too, could have serious implications for regulatory convergence across Europe. In April, Steven Maijoor, chairman of the ESMA, announced that the authority is devising a number of measures which will hopefully help avoid a regulatory ‘race to the bottom’, during which EU Member States will relax their oversight of regulatory standards in order to attract businesses relocating from the UK in wake of the Brexit vote. The loss of passporting rights following the UK’s exit from the EU will likely require companies to create new EU-based regulated entities to service EU business. The European Central Bank has also voiced concerns around a regulatory race to the bottom, and has confirmed that UK firms will not be allowed to avoid regulatory requirements by outsourcing activities back to London from an EU shell company in the future.

Though the Brexit vote has meant that a key cornerstone of the EU will soon be outside of the European project, the withdrawal of the UK will not have a negative bearing on European regulatory supervision. Quite, industries, including financial services, should expect greater movement toward regulatory convergence in the years ahead, particularly as the race to pick up the pieces from the UK’s exit from the EU heats up. A number of jurisdictions across the continent are positioning themselves to inherit the UK’s mantle as the European home of financial services.